MARKET FORCES

COMMODITY
MARKET
GOODS PRODUCED FOR
SALE IN THE MARKET
ALL AREAS IN WHICH
BUYERS AND SELLERS ARE
IN CONTACT WITH EACH
OTHER FOR THE
PURCHASE AND SALE OF
THE COMMODITY
MARKETS
A market is a group of buyers and
sellers of a particular good or service.
The terms supply and demand refer
to the behavior of people . . . as they
interact with one another in markets.
DEMAND

Demand in economics means desire backed up by adequate purchasing
power to pay for the product when demanded and willingness to spend the
money for satisfaction of that desire.

Demand = Desire + Ability to pay + Willingness to pay
DEMAND
Quantity demanded
is the amount
of a good that buyers are
willing and able
to purchase.
MARKETS
Buyers determine demand.
Sellers determine supply.
FACTORS AFFECTING
DEMAND

Price of the product
Income of consumers
Prices of related goods
Substitutes
Compliments
The taste and preferences of consumers
Change in expectations
The number of consumers in the market
Advertisement and sales campaign
FACTORS AFFECTING DEMAND
1. PRICE OF THE COMMODITY
2. THE MONEY INCOME OF THE INDIVIDUAL HOUSEHOLD
3. THE TASTES AND PREFERENCES OF THE INDIVIDUAL
HOUSEHOLD
4. THE PRICES OF OTHER COMMODITIES
Dn = f(Pn , P ..... Pn-YT)
Dn is the demand for commodity n.
Pn is the price of commodity n
P.....Pn- is the prices of all other commodities (other than Pn)
Y is the income of the household
T stands for tastes and preferences of the household
Dn = f(Pn , P ..... Pn-YT)
GENERAL DEMAND FUNCTION QD = f(P)
SPECIFIC DEMAND FUNCTION Dn = f(Pn)
Y = Y
T = T
PPn-
means there is no change in these variables ;
their value is being held constant
DEMAND FUNCTION
LAW OF DEMAND
The law of demand states that, if all other factors remain equal, the higher the
price of good, the less people will demand that good and the lower the price of
a good, the more people will demand that good.

The amount demanded increases with a fall in price and diminishes with a rise
in price
Prof. Marshal

Other things remaining the same, people will buy more at lower prices and buy
less at higher price.
Prof. Samuelson
DEMAND SCHEDULE
The demand schedule is a table
that shows the relationship
between the price of the good
and the quantity demanded.
DEMAND SCHEDULE
Price Quantity
0.00 12
0.50 10
1.00 8
1.50 6
2.00 4
2.50 2
3.00 0

DEMAND CURVE
The demand curve is the downward-
sloping line relating price to quantity
demanded.
DEMAND CURVE
Rs.3
2.50
2.00
1.50
1.00
0.50
2 1 3 4 5 6 7 8 9 10 12 11
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
Price Quantity
0.00 12
0.50 10
1.00 8
1.50 6
2.00 4
2.50 2
3.00 0

MARKET DEMAND
Market demand refers to the sum of all
individual demands for a particular good or
service.
ASSUMPTIONS OF LAW OF
DEMAND
Habits, tastes and fashion of the consumer remain constant
Money income of the consumer does not change
Prices of other related goods remain constant
The commodity in question has no substitute or is not in competition by other
goods
The commodity is normal good and has no prestige or status value
People do not expect changes in the price
Price is independent of any other forces in the market
There is perfect competition in the market
The Size of population will not change

LIMITATION OF LAW OF
DEMAND

Change in taste or fashion
Change in income
Change in prices of other commodities
Anticipatory change in prices
Rare or distinction goods
WHY DOES THE DEMAND
CURVE SLOPES
DOWNWARDS

Income and substitution effects of law of demand
The law of diminishing marginal utility
Increase or fall in number of consumers
Multiple uses of commodity

INCOME AND SUBSTITUTION
EFFECTS OF LAW OF
DEMAND

Income effect The fall in price of a commodity is equivalent to an increase
in income of the consumer, because he spends less while buying the same
quantity of the commodity as before. A part of the money so gained can be
used to buy more of the same commodity.

Substitution effect As the price of a commodity rises, it becomes relatively
more expensive than the substitutes.
THE LAW OF DIMINISHING
MARGINAL UTILITY

The law of diminishing marginal utility states that
as a consumer consumes more and more
units of a specific commodity,
utility from the successive units
goes on diminishing.

Explanation and
Example of Law of Diminishing
Marginal Utility:
Suppose, a man is very thirsty. He
goes to the market and buys one
glass of sweet water. The glass of
water gives him immense
pleasure or we say the first glass
of water has great utility for him.
If he takes second glass of water
after that, the utility will be less
than that of the first one
If he drinks 3
rd
glass of water the
utility declines again and so on.


Units Total Utility Marginal Utility
1st glass 20 20
2nd glass 32 12
3rd glass 40 8
4th glass 42 2
5th glass 42 0
6th glass 39 -3
Schedule of Law of Diminishing Marginal
Utility
From the above table, it is clear that in a given span of time, the
first glass of water to a thirsty man gives 20 units of utility. When
he takes second glass of water, the marginal utility goes on
down to 12 units; When he consumes fifth glass of water, the
marginal utility drops down to zero and if the consumption of
water is forced further from this point, the utility changes into
disutility (-3).


INCREASE OR FALL IN
NUMBER OF CONSUMERS

Fall in price attract new consumers to the product

If the price of product rise, the existing consumers may shift to other related
commodities whose price is lesser.
MULTIPLE USES OF
COMMODITY

If the commodity can be put into several uses, then the fall in price will result
in increase demand. This is because the cheaper commodity will be used for
different uses replacing the costlier commodity.
Ex - LPG
EXCEPTIONS OF LAW OF
DEMAND
Giffen goods
Veblen effect
Speculation
Ignorance about quality (price delusion)
Conspicuous necessities
Emergencies (fear of shortage)
Change in fashion
Bandwagon effect or demonstration effect
Life saving drugs or emergency products
Necessary products
EXCEPTIONS TO THE LAW OF
DEMAND

Law of Demand is a universal phenomenon.

Very rarely, it is so observed that with a fall in price,
demand also falls and a increase in price increases
demand.

The demand curve in such cases is upward sloping.
GIFFEN GOODS

Giffen Goods : In cases of some inferior goods, as observed
by Robert Giffen, when price falls, there is a fall in the
demand for these products.
Eg. This was observed by Giffen in Italy when consumers
purchased less of cheap potatoes when the price went
down and purchased meat from the savings.

Example #1: The price of 1 kg. of potatoes (a staple) goes down from $6 to $2. The
vegetable budget of the consumer is, say, $12. Previously he used to purchase 2 kg.
of potatoes for $12 every month. After the price plunge, he would want to buy just
one kg of potatoes for $2 and with the remaining $10, he can buy a larger variety of
other vegetables.

Example #2: Rice being a staple food of China, it was observed that when the price
of rice was lowered the poor people of China behaved in the Giffen manner;
reducing their demand for rice and in the remaining amount purchased more meat.
When the price of rice was increased, then the demand for rice also increased as
they reduced their purchase of meat.

Example #3: Same kind of behavior was also noticed in some places where bread
was the staple food. When the price was lowered, people bought less bread and
when the prices became high they consumed more of the bread, thus explaining the
Giffen's paradox.
VEBLEN EFFECT

A good for which demand increases as the price increases,
because of its exclusive nature and appeal as a status
symbol.

Very expensive products such as designer jewelry, pricey
watches, and luxury cars that are marketed as being
exclusive, or which convey the appearance of success,
can be classified as Veblen goods
SPECULATION

When the consumers understand that there is a increase in
price of a product and they are expecting a further rise, they
will not mind purchasing more of that product even if its
price is increased.

IGNORANCE ABOUT QUALITY
(PRICE DELUSION)

Many consumers do not purchase products at the time of
discount sales etc assuming that the quality of the
products may have been compromised.

High priced products are better in quality than a low priced
product.


Conspicuous necessities
Emergencies (fear of shortage)
Change in fashion
Bandwagon effect or demonstration effect
Life saving drugs or emergency products
Necessary products


CHANGES IN DEMAND

Extension and Contraction of Demand or A Change in Quantity Demanded

Increase and Decrease of Demand or A Change in Demand
A CHANGE IN QUANTITY
DEMANDED
A movement along the demand curve is caused by a change in the price of
the good only
other things remaining constant. It is also called change in quantity
demanded of the
good. Movement is always along the same demand curve and is of the
following types:
1. Expansion of demand, and
2. Contraction of demand
Expansion of Demand: It refers to rise in demand due to fall in the price of
the good.
Contraction of Demand: It refers to fall in demand due to rise in the price of
the good.
Point A on the demand curve (dd) is the original situation.
An upward movement from point A to a point such as point B shows contraction or lesser
quantity demanded at a higher prices.
A downward movement from point A to a point such as point C Shows expansion or more
quantity demanded at a lower price.
SHIFTS OF THE DEMAND
CURVE
Increase in demand: The
demand curve shifts
UPWARD or to the right,
so that the individual
demands more of the
commodity at each
commodity price, provided
the good is a normal good.
If the price of a substitute
commodity increases or
the price of a
complementary commodity
falls, or if the consumers
taste for the commodity
changes, the demand
curve shifts upward to the
right.
Decrease in demand: With opposite changes in factors affecting demand, the
demand curve shifts to dx2
TYPES OF DEMAND

Consumer Goods and Producer Goods
Perishable and Durable Goods
Autonomous and Derived Demand
Short run demand and long run demand
Joint demand and Composite demand
Firm and Industry Demand
Demand by Market Segments and by Total Market
CONSUMER GOODS AND
PRODUCER GOODS

Goods and services used for final consumption are called consumer goods.
These include, goods consumed by human-beings, animals, birds etc.
Eg Food items, ready made clothes

Producer goods refers to the goods used for production of other goods, like
plant and machines, factory buildings, services of employees, raw materials
etc.

PERISHABLE AND DURABLE
GOODS

Perishable goods become unusable after sometimes, others are durable
goods.
Precisely, perishable goods are those which can be consumed only once
while in durable goods, their services only are consumed.

Sales of non-durables are made largely to meet current demands which
depends on current conditions.
In contrast, sales of durable goods go partly to satisfy new demand and
partly to replace old items.
AUTONOMOUS AND DERIVED
DEMAND

The goods whose demand is not tied with the demand for some other goods
are said to have autonomous demand, while the rest have derived demand.

Thus the demand for all producer goods are derived demands as they are
needed to obtain consumer or producer goods.
SHORT RUN DEMAND AND
LONG RUN DEMAND

Short-run demand refers to existing demand, with its immediate reaction to
price changes, income fluctuation etc

Long-run demand is that which will ultimately exist as a result of changes in
pricing, promotion or product improvement
JOINT DEMAND AND
COMPOSITE DEMAND
Joint demand can also be called as complementary demand. When two
goods are demanded together at the same time to satisfy a single want, it is
called a joint demand.
Eg Pens and ink, bike and petrol, bread and jam, torch light and battery

Composite demand on other hand refers to demand for a product, when it is
demanded for several different uses
Eg Water which can be used for cooking, drinking, cleaning.
FIRM AND INDUSTRY
DEMAND

Goods are produced by more than one firm and so there is a difference
between the demand facing an individual firm and that facing an industry. (All
firms producing a particular good constitute an industry engaged in the
production of that good).

For example, demand for Fiat car alone is a firms demand and demand for
all kinds of cars is industrys demand.
DEMAND BY MARKET
SEGMENTS AND BY TOTAL
MARKET

The total demand would mean the total demand for the product from all
market segments while a particular market segment demand would refer to
demand for the product in that specific market segment.
INTRODUCTION

Elasticity of demand measures how much the quantity demanded changes
with a given change in price of the item, change in consumers income, or
change in price of a related product.

49
PRICE ELASTICITY OF DEMAND

A. The law of demand tell us that consumers will respond to a price
decrease by buying more of a product (other things remaining
constant), but it does not tell us how much more.

B. The degree of responsiveness or sensitivity of consumers to a change
in price is measured by the concept of price elasticity of demand.

50
PRICE ELASTICITY OF DEMAND

1. If consumers are relatively responsive to price changes,
demand is said to be elastic.
2. If consumers are relatively unresponsive to price changes,
demand is said to be inelastic.
3. Note that with both elastic and inelastic demand,
consumers behave according to the law of demand; that is,
they are responsive to price changes. The terms elastic or
inelastic describe the degree of responsiveness.

51
PRICE ELASTICITY FORMULA

The quantitative measure of elasticity can be found by using this
formula:

E
d
=





52
ELASTICITY OF DEMAND
A measure of the relationship between a change in the quantity demanded of a
particular good and a change in its price. Price elasticity of demand is a term in
economics often used when discussing price sensitivity. The formula for calculating
price elasticity of demand is:


Price Elasticity of Demand = % Change in Quantity Demanded / % Change in
Price


If a small change in price is accompanied by a large change in quantity demanded,
the product is said to be elastic (or responsive to price changes).
Conversely, a product is inelastic if a large change in price is accompanied by a
small amount of change in quantity demanded.
DETERMINANTS OF
ELASTICITY OF DEMAND

Luxury or necessity goods: Luxury goods tend to have an elastic demand,
while necessity goods have an inelastic demand. Purchasers can stop
buying the luxury goods when their prices rise.
Percentage of income: Big items in a budget tend to have a more elastic
demand than small items. For example, consumers may be affected by 1 per
cent rise or fall in price of a flat but are insensitive to such fluctuations in
prices of pens.
Substitutes: Items that can be substituted easily have a more elastic
demand than those that do not.
Time: The demand for a product becomes more elastic the longer the time
period under consideration. It takes time to decide about other product
before buying it as one develops a habit of using a particular product.
Impact of Globalization on Indian Business and Industry
State the impact of Technology on Indian Business

DEFINITION OF PRICE ELASTICITY
OF DEMAND

The change in the quantity demanded of a
product due to a change in its price is
known as Price elasticity of demand. Thus,
the sensitiveness or responsiveness of
demand to change in price is as called
elasticity of demand
PRICE ELASTICITY FORMULA

The quantitative measure of elasticity can be found by using this
formula:

E
d
=





58
MEASUREMENT OF PRICE
ELASTICITY OF DEMAND

Income Elasticity Of
Demand =


i.e.
Income Elasticity Of
Demand =
q
Q
P
P
*
KINDS OF PRICE ELASTICITY OF
DEMAND

1) Perfectly elastic demand
2) Relatively elastic demand
3) Elasticity of demand equal to utility
4) Relatively inelastic demand
5) Perfectly inelastic demand

PERFECTLY ELASTIC DEMAND (E
= 00)




P
R
I
C
E

y
0 x
Perfectly elastic
demand curve
D
D
When the
demand for a
product
changes
increases or
decreases
even when
there is no
change in
price, it is
known as
perfect elastic
demand.
RELATIVELY ELASTIC
DEMAND (E > 1)
Relatively elastic
demand curve
P
R
I
C
E

demand
0 x
y
D
D
When the
proportionate
change in
demand is
more than the
proportionate
changes in
price, it is
known as
relatively
elastic
demand.
ELASTICITY OF DEMAND EQUAL TO
UTILITY (E = 1)
Elasticity of
demand equal
to utility curve
y
x
0
demand
P
R
I
C
E

D
D
When the
proportionate
change in
demand is
equal to
proportionate
changes in
price, it is
known as
unitary elastic
demand
RELATIVELY INELASTIC
DEMAND (E < 1)
Relatively inelastic
demand curve
X
O
Y
demand
D
D
P
R
I
C
E

When the
proportionate
change in
demand is less
than the
proportionate
changes in price,
it is known as
relatively inelastic
demand
PERFECTLY INELASTIC
DEMAND (E = 0)
demand
D
D
Perfectly inelastic
demand curve
0
Y
X
P
R
I
C
E

When a change in
price, howsoever
large, change no
changes in quality
demand, it is
known as perfectly
inelastic demand
ALL KINDS OF DEMAND CAN BE
SHOWN IN ONE DIAGRAM AS
FOLLOW
D
D1
D2
D3
D4
D5
Y
X 0


DEMAND
P
R
I
C
E
WHERE
D1) Perfectly elastic
demand
D2)Relatively elastic
demand
D3)Elasticity of demand
equal to utility
D4)Relatively inelastic
demand
D5)Perfectly inelastic
demand

Price elasticity of demand measures the responsiveness of demand to
changes in price for a particular good.
If the price elasticity of demand is equal to 0, demand is perfectly inelastic
(i.e., demand does not change when price changes).
Values between zero and one indicate that demand is inelastic (this occurs
when the percent change in demand is less than the percent change in
price).
When price elasticity of demand equals one, demand is unit elastic (the
percent change in demand is equal to the percent change in price).


Finally, if the value is greater than one, demand is perfectly elastic (demand
is affected to a greater degree by changes in price).

For example, if the quantity demanded for a good increases 15% in
response to a 10% decrease in price, the price elasticity of demand would
be 15% / 10% = 1.5. The degree to which the quantity demanded for a good
changes in response to a change in price can be influenced by a number of
factors

INCOME ELASTICITY OF
DEMAND

Income elasticity means a percentage
change in demand caused by a percent
change in income
TYPES OF INCOME
ELASTICITY OF DEMAND

Positive Income elasticity of demand
Negative Income elasticity of demand
Zero Income elasticity of demand
POSITIVE INCOME ELASTICITY
OF DEMAND

Y
P
A
D
D
B S
O X Quantity Demanded
I
n
c
o
m
e

POSITIVE INCOME ELASTICITY OF
DEMAND

Income Elasticity Equal to Unity or One
Income Elasticity Greater Than Unity Or One
Income Elasticity Less Than Unity or One
NEGATIVE INCOME
ELASTICITY OF DEMAND

P
r
i
c
e

P
B
A
S
Total Revenue
Quantity Demanded
ZERO INCOME ELASTICITY
OF DEMAND
Y
X
O
D
D
Quantity Demanded
I
n
c
o
m
e

MEASUREMENT OF
INCOME ELASTICITY OF
DEMAND

Income Elasticity Of
Demand =
Proportionate change in
Demand
Proportionate change in
Income
i.e.
Income Elasticity Of
Demand =
q
Q
Y
Y
*
MEASUREMENT OF
INCOME ELASTICITY OF
DEMAND

Here , q = Change in the quantity
demanded.
Q = Original quantity demanded.
y = Change in income.
Y = Original income.
For e.g. ,when Income of the consumer =
2,500/- , he purchases 20 units of X, when
income = 3,000/- he purchases 25 units of X




MEASUREMENT OF
INCOME ELASTICITY OF
DEMAND
Thus
Income Elasticity of Demand
=

= (5/20) + (500/2500)
= 1.25
therefore here the IED is 1.25 which is more
than one.
q
Q

Y
Y
*
CROSS ELASTICITY OF
DEMAND

Cross elasticity of demand express a
relationship between the change in the
demand for a given product in response
to a change in the price of some other
product
E.g. if the X tea demand reduces
tremendously than it effect could be seen in
demand of sugar and milk.

TYPES OF CROSS
ELASTICITY OF DEMAND

Cross Elasticity of Demand Equal to Unity
or One
Cross Elasticity of Demand Greater than
Unity or one
Cross Elasticity of demand less than unity
or one

MEASUREMENT CROSS
ELASTICITY OF DEMAND
Proportionate change in
Demand for product X
Proportionate change in Price
of product Y
i.e.
qx
Qx Py
py
Cross Elasticity of
Demand =
Cross Elasticity of
Demand =

CROSS ELASTICITY OF
DEMAND FOR
SUBSTITUTES
P
r
i
c
e

o
f

Y

Demand for
Y
O
Y
X
D
D
CROSS ELASTICITY OF DEMAND
FOR COMPLEMENTARY
PRODUCTS
P
r
i
c
e

o
f

Y

O
Y
X
D
D
Demand for
Y
CROSS ELASTICITY OF
DEMAND FOR NEUTRAL
PRODUCTS
P
r
i
c
e

o
f

Y

O
Y
X
D
Demand for
Y
ADVERTISING ELASTICITY
OF DEMAND

Advertising elasticity of demand is the
measure of the rate of change in demand
due to change in advertising expenditure
The amount of change in demand of goods
due to advertisement is known as
Advertisement Elasticity of Demand .


ADVERTISING ELASTICITY
OF DEMAND
Proportionate change in
Demand for product
Proportionate change in
Advertising expenditure
i.e.
qx
Q A
a

Advertising Elasticity of
Demand =
Advertising Elasticity of
Demand =
RELATIONSHIP BETWEEN
ADVERTISING EXPENDITURE
AND SALES
O
X
Y
S
S
S
a
l
e
s

Advertising
Expenditure
COST OF ADVERTISEMENT
AND DERIVED DEMAND
RELATIONS.


MEASUREMENT OF PRICE
ELASTICITY OF DEMAND

Income Elasticity Of
Demand =


i.e.
Income Elasticity Of
Demand =
q
Q p
P
*
MEASUREMENT OF PRICE
ELASTICITY OF DEMAND

Total outlay method
Proportion method
Point Method
Arc Method
PROPORTION METHOD

TOTAL OUTLAY METHOD

POINT METHOD

ARC METHOD

SUPPLY

The quantity supplied is the number of units that sellers want to sell over a
specified period of time at a particular price.

Law of Supply states that all other factors remaining unchanged the supply
of a good increases as its price increases. This can be shown by a supply
schedule, a supply curve or a supply function.
Supply schedule

There exists a positive relation
between quantity and price
price quantity
1 2
5 10
8 15
13 25
20 35
Supply Curve:
qty
price
Supply function shows the relation between quantity
and price.
ASSUMPTIONS OF THE LAW
OF THE SUPPLY
The number of firms in the market remains the same and so is the case of
technology
The speed of production do not change
Market prices of related goods remain constant over a period of time
Cost of production does not change
Climatic conditions and taste and preferences of the consumers also remain
unchanged
No other inputs are available in the market
DETERMINANTS OF SUPPLY
Price
Cost of production
Technological progress
Prices of related outputs
Govt policy
Cost of production
ELASTICITY OF SUPPLY

Elasticity of supply means the response of supply to a change in the price of
commodity

Price elasticity of supply =
Proportionate change in the quantity
supplied
Proportionate change in price
DEMAND FORECASTING-

METHODS


SUPPLY-

LAW OF SUPPLY

DETERMINANTS OF SUPPLY